By spreading their wings, banks increase their risks

Stewart Oldfield

IN THE mid-1980s, three big Australian banks - ANZ, Westpac and National Australia Bank - embarked on a dramatic overseas expansion.

We had just won the America's Cup and we weren't going to sit around and allow new foreign entrants into our home market without first marching into theirs.

The banks argued that the Australian market was of a finite size and deregulation had stripped away protection from global players wanting to enter the Australian market.

No other bank embarked on a more enthusiastic period of expansion than Westpac, with its desire to become Australia's world bank.

Westpac, then the country's biggest bank, showed a willingness to expand beyond traditional banking overseas. It bought a sizeable bullion trading business in Britain in 1986, beating 40 international rivals, and in 1987 bought US bond dealer William E. Pollock Government Securities.

''The only way for real growth is to go outside Australia,'' said Bob White, Westpac's managing director at the time.

Between 1984 and 1986, Westpac's assets more than doubled. White referred to it as ''judicious but vigorous lending''.

ANZ also had international ambitions. In 1984, it bought Grindlays, a British bank, but with most of its assets sourced overseas. It had been established in the first half of the 19th century and had operations in 40 countries, including India, the Gulf states and East Africa - exotic banking markets, far from our time zone and where often little English was spoken.

NAB then joined in. In 1987, it bought Clydesdale Bank (Scotland) and Northern Bank (Northern Ireland and Republic of Ireland) from a distressed Midland Bank.

More acquisitions and expansion followed. In 1975, Australian banks had a presence in 16 countries, but by 1987 this had risen to 50. The aggregate value of offshore assets rose from less than $3 billion to nearly $81 billion over the same period. The proportion of these assets of total assets doubled to 31 per cent.

Fast forward 25 years and the landscape is very different. Commonwealth Bank is the biggest bank by market capitalisation, having evaded the overseas drive of its peers because it was not fully privatised until the mid-1990s.

ANZ is back on the Asian expansion path, having sold the last of its Grindlays business in 2000. Westpac is tentatively expanding in Asia, having divested much of its international business in the early 1990s.

National Australia Bank is looking to end the pain from its operations in Britain once and for all. From having the biggest market capitalisation in the 1990s, it now has the smallest of the majors. The lesson for all companies, big and small, and financial and non-financial, might be that measured rather than rapid expansion is best when heading offshore, and closer to home might be preferable to far away, especially when the globe's fastest-growing region is on our doorstep.

A bank's board has to ensure it has sufficient management expertise and systems to match its ambitions.

So far, Australian banks have shown little ability to persevere with an overseas strategy through multiple economic cycles, picking up assets when they are cheap in their targeted markets. Right now is definitely not the best time to be expanding via mergers and acquisitions in Asia and each of the big banks knows that.

In hindsight, the best time to have expanded in Asia would have been during the Asian crisis more than a decade ago, but hindsight is easy for companies wanting to grow.